The Capacity Market (CM) provides batteries with a predictable, contracted income stream paid throughout the year, in return for a commitment to deliver capacity during periods of peak demand. The T-4 auction also lets developers lock in contracted revenue up to four years before the delivery year, often a key factor in project financing.

Since June 2025, CM has accounted for 13% of battery revenues, rising to 22% in lower merchant-revenue months, February 2026 being a recent example. In some winters, this share can climb significantly further. In winter 2023/24, CM revenues reached 30% of the total revenue stack.

Contents

• What is the Capacity Market?
• How Capacity Market auctions work
• Capacity Market clearing prices from 2018/19 to 2029/30
• De-rating factors: how battery duration determines contracted capacity
• How to calculate CM contract value for a battery
• Annual participation cycle: prequalification to delivery
• Delivery obligations, testing and penalties
• Key data sources
• Reference data

What is the Capacity Market?

The Capacity Market in Great Britain exists to address the "missing money" problem. Without a separate capacity payment, the market risks underinvesting in the generation needed to maintain security of supply.

In a pure energy-only electricity market, generators earn revenue only when they dispatch. This can create insufficient incentive to build or maintain firm capacity. The network requires these plants to be available should they be needed at times of system stress, but their run costs mean it is not economical to operate unless prices are high. This may not happen often enough to make the plant profitable, so the aim of a capacity payment is to ensure generation is economically viable and that there is sufficient firm capacity on the system.

The CM pays capacity providers a fixed rate per kilowatt of de-rated capacity per year (£/kW/year) for being available during winter. Providers must deliver their contracted capacity when called upon during a System Stress Event. The delivery year runs from 1 October to 30 September.

The CM is technology-neutral. Battery energy storage systems (BESS), gas peakers, nuclear, pumped hydro, demand-side response, and interconnectors all compete in the same auctions. CM payments sit alongside wholesale trading, the Balancing Mechanism, and ancillary services in a BESS's revenue stack. For a full overview of how batteries earn across these markets, see How does a battery energy storage system make money?.

How Capacity Market auctions work

Firm capacity describes a theoretical resource that delivers a completely consistent and uninterrupted electricity supply. The government sets a target of how much firm capacity it thinks is necessary to acquire. Capacity Market contracts are awarded through two different annual auctions, both taking place in February or March and run by the EMR Delivery Body.

How the auction clears

The Capacity Market uses a descending clock auction with pay-as-clear pricing. The auction opens at a Price Cap of £75/kW/year and the price falls by £5/kW/year each round. Bidders either remain in the auction implicitly via Continuing Bids, or submit Exit Bids stating the minimum price they will accept.

Most existing assets are classified as Price Takers, meaning they are assumed to be viable at lower prices and must exit at or below £25/kW/year. Assets that can demonstrate they need higher revenues to be economically viable are classified as Price Makers and can hold out for any price up to the cap.

The auction closes in the round where remaining supply falls below the grid's published Demand Curve. The final Clearing Price is then set either by an Exact Match, where supply and demand align precisely, or far more commonly by the Net Welfare Algorithm, which calculates whether marginally over- or under-procuring capacity is the better outcome for consumers.

T-4 auctions

T-4 auctions take place four years ahead of the delivery year they cover. They are a key early investment signal for new-build assets: developers can secure long-term revenue certainty before committing capital. The T-4 runs over multiple days as a descending clock auction, with the clearing price dropping in £5/kW increments each round until remaining capacity matches the government's target.

T-1 auctions

T-1 auctions take place one year ahead of the delivery year. They serve as a top-up mechanism, adjusting for changes in demand forecasts and any capacity that has closed or failed prequalification since the T-4. T-1 auctions run over one to three days and are dominated by existing rather than new-build capacity.

Contract lengths

Multi-year agreements are only available in T-4 auctions where contract lengths are determined by a project's capital expenditure (CapEx). T-1 winners receive one-year agreements regardless of CapEx.

The 9-year tier was introduced in 2024 to create a route to multi-year agreements for mid-CapEx technologies, including storage. Its threshold was set as the midpoint between the 3-year and 15-year figures. Thresholds are inflation-indexed each auction cycle.

Capacity Market Units (CMUs)

Every participant in the CM registers a Capacity Market Unit (CMU), the entity that holds a Capacity Agreement and is obligated to deliver during a stress event. A site can be registered as a single aggregated CMU or split into multiple CMUs, one per generating unit.

Splitting offers flexibility: separate CMUs can bid different durations, hold agreements across different delivery years, and transfer individual agreements independently. To split a site, each generating unit must be independently controllable, have metering that separately identifies its output, and be submitted as a distinct prequalification application.

Agreement eligibility

A CMU can hold only one active Capacity Agreement at a time and cannot re-enter auctions while under a multi-year agreement. Once a 15-year agreement expires, the CMU becomes an Existing CMU eligible only for one-year agreements.

To qualify again for a multi-year term, it must apply as a Refurbishing CMU with planned CapEx meeting the relevant threshold. In practice, incremental CapEx on an existing site typically falls below the £350/kW threshold for a new 15-year agreement, as it excludes grid connection, land, civil works, and other fixed infrastructure already in place.

Capacity Market clearing prices from 2018/19 to 2029/30

T-4 and T-1 clearing prices reflect different supply and demand dynamics. T-1 prices are more volatile, responding to near-term capacity surplus or deficit, and often have a political element.

They peaked at £75/kW for the 2022/23 delivery year and declined to £5/kW for 2026/27 due to of dispatchable technologies such as BESS. T-4 prices rose from £8.40/kW for the 2021/22 delivery year to a peak of £65/kW for 2027/28 before falling to £27.10/kW for 2029/30.